Presentation to the:

Pennsylvania PublicUtility Commission

Demand-Side ResponseWorking Group

December 8, 2006

Gas UtilityDecoupling

in New Jersey

A Case Study:New Jersey Natural Gas

& South Jersey Gas

Conservation

Incentive

Programs

YARDLEY & ASSOCIATES

DANIEL P. YARDLEY

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Today’s Discussion

Market and Regulatory Environment in New Jersey

Timeline

Key Features of NJNG and SJG Programs

Public Policy Benefits of Programs

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Market Conditions Affecting New Jersey Gas Consumers

Unfavorable commodity pricing environment

tight demand/supply conditions

commodity prices subject to rapid price fluctuations due to supply disruptions or demand increases

Unfavorable conditions expected to persist

Utility purchasing and hedging practices can only partially shield customer from impact of higher commodity prices

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Regulatory Backdrop for Decoupling Proposals

Traditional ratemaking approach

Historic test year

Majority of fixed costs recovered through variable charges

Decline in customer usage is detrimental to utility earningsUtility promotes increased usage to increase profitability

Natural disincentive for utility-promoted energy efficiency

Weather normalization clauses stabilize impact of abnormal weather on margin recoveries

Significant commitment to conservation and energy efficiency through the New Jersey Clean Energy Program

Managed by the New Jersey Board of Public Utilities

Funded through public purpose assessment paid by all electric and gas customers

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Timeline for Implementation

December 5, 2005 – NJNG and SJG file coordinated proposals with the New Jersey BPU

January through August 2006 – Discovery and negotiation

New Jersey BPU Energy Division Staff

New Jersey BPU Clean Energy Staff

New Jersey Rate Counsel (consumer representative)

October 2006 – Stipulation filed with New Jersey BPU

October 12, 2006 – New Jersey BPU approves stipulation

October 1, 2006 – Implementation of three-year pilot program

January 15, 2009 – Independent evaluation submitted to parties to consider extension or modification of programs

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Key Features: New Customer Programs Highly customized customer communications

Leverage utility knowledge and contacts with individual customers

Millions of contacts per year

Complement existing New Jersey Clean Energy programs and available Federal Tax incentives

Raise awareness

Offer additional benefits

Sample programs funded by NJNG and SJG

Customized mailing detailing potential savings for implementing various conservation measures

Zero percent financing to accompany state efficiency rebates

Investigate innovative programs for future years

Potential for advanced metering and inverted pricing

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Key Features: Conservation Incentive Tariff

Margin per customer decoupling accomplished via throughput rider

Rider replaces existing weather normalization clause

Margin impact of weather and non-weather related changes in customer usage from baseline included in rider

Baseline customer usage calculated for various customer class groups, e.g. residential heating, residential non-heating, and commercial groups

Rider adjusted once per year based on throughput for the annual period ending September 30th

Non-weather related impacts of changes in customer usage subject to gas supply savings test

Gas supply savings generated through reduced peak consumption

Designed so that sales customers who do not lower usage do not receive a price increase

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Public Policy Benefits Removes financial incentive for utility to grow throughput of existing customers

allows utility to aggressively promote energy efficiency and conservation public policy without suffering financial penalty

utility is uniquely positioned to drive additional penetration of measures by leveraging its direct customer relationships and contacts

promotes stronger partnership between utility and policy makers on conservation issues

Customers receive new and innovative opportunities to participate in efficiency and conservation programs

savings opportunities are significant in a high commodity pricing environment

reductions in peak demand will contribute to lower costs for all customers Continue pricing incentives for customers to reduce energy consumption

retain delivery-based rate design framework Benefit the environment and future generations through reduced energy consumption

Stabilize margin recovery

declines in customer consumption do not dampen utility financial performance

maintains investment community confidence in utility

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